What you should know when saving for your first home down payment

Saving up for a down payment is every first-time homebuyer’s major step when buying a home. In truth, most people can’t save even a percentage of the home’s price that fast. Regardless, knowing where to open a down payment fund is a vital consideration as you prepare to go house hunting and make your home purchase.

Most homeowners need a loan money to help with the home cost. To get this money, they have to apply for a mortgage loan from a bank or institution. Banks asks for down payments before granting a loan, which helps cut their risk. Most banks prefer to do business with borrowers who can make big down payments for obvious reasons.

How much should I save?

Banks and lending institutions favour borrowers who have around at least a fifth of the asking price on hand. The percentage banks look for is often much higher for high-risk borrowers. Look at the types of homes you desire, then calculate 20% of its asking price. What you end up with is the amount that you need to save.

If you have a good credit standing, or eligible for certain programs like the First Homeowner Grant, you may be able to acquire a loan with less than 20% down. Take note that such loans need the borrower to secure private mortgage insurance (PMI), at an extra cost.

Where do I put my savings?

Now that you know how much you’ll need to save;your next step is to decide on a place to keep your savings. Based on your timeline, here are a few options:

Savings Account. The most upfrontapproachthat involves opening a savings account at a bank where you do your checking. If you’re an existing customer, you can open a savings account very quickly, make transfers from checking accounts, or set up recurrent transfers from checking on paydays.

However, banks usually have very lowinterest rates. When you use a savings account at your bank, you’re taking convenience over return on investment.

Investment Account. If you’re not rushing, consider investing your money into an investment account at a major brokerage. Using investment accounts, you can buy bonds, stocks, as well as funds that can pay much higher interest rates. Regardless, there are bigger risks connected with the investments.

Investment accounts are not FDIC insured and stock prices tend to fluctuate, and you can even lose some of your investment, sometimes all of it. But, as a whole, the market has always improved from recessions and gotten to new highs. If you can wait, in cases where the market turns bad, and investment account offers you the best potential while you saving up for your home.

If you’re looking for convenience, you’ll do well with a saving account at your current bank. If you’re okay with a little risk, investment accounts can give the best returns on investment but can go down in value in the short term.

Be honest with your goal so you can make the best-informed decision. It’s not something you’ll want to rush into or risk messing up. Research carefully, so you can reach a decision that you’ll end up being comfortable with.